activity.

The attraction for Wall Street is that all those expensive economists paid to
predict the economy would finally have a tradable instrument to put their predictions to
work. As this year has again made obvious, the stock market isn’t the economy.

More prosaically, pension funds and others whose future costs are tied to parts of the
economy not captured by stocks and bonds, such as salaries, would be better able to link
their investments to their liabilities.

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Governments should like it, too. It would be easier to justify spending in a recession if the
national debt had just dropped. Countries whose bonds are treated as a credit risk—
including Italy and the rest of the European periphery, but mainly emerging markets—
would benefit by having less pressure on their debt in a crisis. This would allow them to
avoid the austerity often demanded by lenders.

Italy’s issue helps to raise the profile, as it is Europe’s biggest debtor. But its GDP link is
really a marketing device with the slogan: “Because Italy grows with you.” The GDP-
linked bonus is paid only to those who buy and hold to maturity in 10 years, and is
limited to 1% to 3%, tied to the average growth of the economy over the decade. Popular
savings certificates sold by Portugal have a stronger connection to GDP, but aren’t bonds.

True GDP bonds would be quite different. At the very highest level they would be a form
of insurance for governments against a drop in tax receipts. The private-sector buyers act
as the insurer. To work, the buyers as a group need to be stronger than the government,
and need not to be the taxpayers of the government. Your own taxpayers can’t insure
your tax receipts, so the small investors who have piled into Italy’s new bonds are exactly
the wrong customers.

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Emerging markets that borrow in foreign currencies, and weak eurozone countries that
can’t be sure of central-bank support, might want to pay up for the insurance. Big foreign
institutions should be happy to provide that insurance, for a price. And speculators would
get a pure instrument to bet on economic growth.

Robert Shiller of Yale University, who highlighted the benefits of GDP-linked

investments back in 1993, thinks the bonds make sense even for the U.S. to protect
against disaster. “The coronavirus is a reminder that catastrophes happen,” he said. “This
is a time to think through GDP-linked bonds again.”

The catastrophe in question would have to be truly awful, though. U.S. Treasurys, British
gilts and German bunds are typically more in demand in a recession, and the countries
have, so far, been able to raise their debt levels without scaring investors.